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How 'shock therapy' created Russian oligarchs and paved the path for Putin

Russian Prime Minister Vladimir Putin in a meeting with Russian oligarch Roman Abramovich (on the left, in the center) in 2010.
Alexei Nikolsky
Russian Prime Minister Vladimir Putin in a meeting with Russian oligarch Roman Abramovich (on the left, in the center) in 2010.

It's been a rough few weeks for Roman Abramovich.

The British government blocked him from entering the country and froze his assets, depriving him of a glittering collection of sports cars, his 15-bedroom mansion in central London, his penthouse overlooking the River Thames, and the Chelsea soccer club.

The European Union is also messing with his finances and banning him from traveling into its 27 member states. No more summering in Saint-Tropez or wintering in Chamonix.

In the United States, members of Congress are now calling on President Biden to sanction Abramovich, threatening his megamansion on the Upper East Side.

It's not just governments. Last week, a Pro-Ukraine activist in Spain chartered a boat and attempted to graffiti Abramovich's 458-foot superyacht, Solaris, which was docked in a Barcelona marina. Although the activist failed, Abramovich directed his two superyachts (he has another one) to head east for safety.

Abramovich, himself, has fled east for safety, back home to Russia, which seems to be one of the few nations where he's welcome these days.

All of this is a lot of unwanted publicity for a man with a reputation for shunning the spotlight. An orphan who grew up in the frozen tundra of Siberia, Abramovich rose from nothing to become a tycoon worth an estimated $13 billion. Younger than most in the first generation of Russian "oligarchs" — as the Russians would come to disparagingly call them — the boyish Abramovich became known as "the stealth oligarch" because, unlike many of his plutocratic contemporaries, he kept his head down.

In the 1990s, Abramovich became the protégé of Boris Berezovsky, who was probably the least stealthy oligarch. Berezovsky had a big mouth. In 2000, he made the mistake of openly challenging a new president by the name of Vladimir Putin, someone Berezovsky had played a big role in helping to get elected president. When Putin threw down the hammer, Berezovsky was forced to flee Russia — and Abramovich, a staunch (and tight-lipped) Putin loyalist, took over much of Berezovsky's oil and media empires. Berezovsky remained a vocal Putin critic after moving to London. He was found dead there in 2013, hanging from a noose in his bathroom. Investigators are divided on whether it was suicide or murder.

With the exception of Abramovich and a few other notables, the cast of characters comprising Russia's oligarchy has been largely replaced since the 1990s, after Putin began purging oligarchs and anointing his own oligarchs in an effort to fortify his reign. However, the power structure remains the same. It's a symbiotic relationship in which the oligarchs' economic power buttresses the political power of the Russian president, and the president's power buttresses the economic power of the oligarchs — like a medieval king getting tribute from his aristocracy in exchange for his protection. It's an arrangement that the West is now fighting to disrupt.

It's impossible to know what would have happened to Russia in an alternate universe, where the nation's transition to capitalism was handled more gradually and fairly, and the oligarchs had never taken the helm of Russia's economy. We do know, however, that their story is crucial to understanding the rise of Putin.

The Rise Of The Oligarchy

The Russian oligarchy arose out of the mayhem of rapid privatization in the 1990s. After the fall of the Soviet Union in 1991, Russian president Boris Yeltsin, a leader in the revolt against communism, had to figure out how to transition from a command-and-control economy to a market one. Yeltsin turned to the Russian economists Yegor Gaidar and Anatoly Chubais, who, with the aid of Western advisers, hammered out the details.

There were many economists — including even Gaidar and Chubais themselves before they became government officials — who believed that the transition to capitalism would best be handled gradually. They knew the transition would be complex and painful, and it made sense for Russia to first create the institutions that healthy, competitive markets need to flourish — like independent courts, functioning capital markets, and strong regulatory bodies.

But Yeltsin and his allies believed that time was not on their side. An attempted coup in August 1991 by Soviet hardliners against the reformers almost derailed the whole project. Entrenched Soviet industrialists and party insiders wanted a return to the old order. The Yeltsin administration decided that a program known as "shock therapy" — rapidly unleashing market forces — was the way to electrocute the old Soviet system and jolt Russia into embracing capitalism.

American advisors and global creditors, especially the International Monetary Fund, played a notable role advocating for shock therapy. But some influential shock therapists, like the economist Jeffrey Sachs, then at Harvard, believed such a radical program needed support. He proposed the United States and multilateral development agencies help Russian reformers succeed with a $30 billion aid package, akin to what America had provided Europe after WWII with the Marshall Plan. Sachs also called for the cancellation of Russia's debts. But these ideas were rejected by American leaders.

President Yeltsin delivered the first big shock to the Russian economy when he lifted price controls in December 1991. As the Soviet economy collapsed, however, the policy ended up unleashing hyperinflation. By 1994, consumer prices in Russia would skyrocket to almost 2000 times what they had been in 1990. That candy bar that had cost $1 now cost $2000. Hyperinflation devastated ordinary Russians.

Meanwhile, Chubais was tasked with overseeing mass privatization. That entailed transforming a nation whose almost entire economy consisted of state-controlled industries — manufacturing plants, oil refineries, mines, media outlets, biscuit factories, you name it — into private enterprises. It was, to date, surely the biggest transfer of state assets to private owners in world history.

Privatization was conducted in two waves. The first wave, which began in October 1992, had at least the veneer of being a fair and open process. Russia issued 148 million "privatization checks," or vouchers, to Russian citizens. These vouchers could be freely sold or traded. They could then be used to buy shares of state enterprises going private at public auctions around the nation. It was like the former Soviet Union was holding the world's largest garage sale and vouchers were the tickets to shop.

The people on their way to becoming Russia's first class of oligarchs scoured the nation, trying to buy as many vouchers as they could. Many of the oligarchs had come from nothing. They had initially gotten rich — but not quite buy-superyachts rich just yet — by hustling in the black market or through legitimate businesses when the Soviet Union first allowed private entrepreneurship in the late 1980s. For example, Roman Abramovich made his first pot of money selling rubber ducks and other random objects to Russians out of his Moscow apartment (seriously). He was also a mechanic. By the time privatization began, many soon-to-be oligarchs owned banks and had enough money to buy lots of vouchers.

The oligarchs went on a buying spree, purchasing hundreds of thousands of vouchers, each of which were worth 10,000 rubles, or about $40 or less back in the 1990s. Average Russians, who were struggling during hyperinflation, were often eager to sell. After amassing vouchers, the oligarchs — both come-up-from-nothing hustlers and former Soviet government insiders — used them at auctions to buy up stocks in newly private companies. By all accounts, many of these enterprises were shockingly undervalued — and those who were able to get large chunks of lucrative enterprises became fabulously wealthy in a very short period of time. Between 1992 and 1994, about 15,000 state-run enterprises went private under the program.

By 1994, when the voucher program ended, around 70 percent of the Russian economy had been privatized. But some of the biggest, most valuable industries remained in the government's hands. Chubais had plans to privatize these state enterprises and raise much needed funds for the government by selling them off for cash to the highest bidder in legitimate auctions. However, politics got in the way of the increasingly unpopular privatization drive — and even threatened to reverse it. That's when the Yeltsin administration resorted to a much shadier form of privatization.

The "Loans For Shares" Scheme

By 1995, Boris Yeltsin was very unpopular. Hyperinflation. The decline of law and order. The rise of the mafia and execution-style killings on the streets of Moscow. Russia's inability to pay government salaries and pensions. The sense that unscrupulous men in suits were the only ones winning in the new economy. Plus, Yeltsin was a notorious drunk with serious health problems. Just a year away from reelection, Yeltsin's approval rating fell to the low single digits, and he faced the specter of an increasingly popular Communist challenger who looked like he could win the 1996 presidential elections.

With privatization stalling, the government desperate for money, and a growing fear that Russia was about to slide back into communism, Chubais and the Yeltsin administration turned to a shady scheme known as "Loans For Shares." The secret plot basically worked like this: the richest oligarchs loaned the government billions of dollars in exchange for massive shares of Russia's most valuable state enterprises. When the government defaulted on paying back the loans, as the schemers expected they would, the oligarchs would walk away with the keys to Russia's most profitable corporations. In exchange, the government would get the money it needed to pay its bills, privatization would keep moving forward — and, most importantly, the oligarchs would do everything in their power to ensure Yeltsin was reelected.

Between November and December 1995, twelve of Russia's most profitable industrial enterprises were auctioned off to the oligarchs, including a mining company, two steel companies, two shipping companies, and five oil companies. The auctions were a complete farce. Chubais and his team had predetermined with the oligarchs who would get what and for roughly how much. And the prices the oligarchs paid for these corporations were a steal — almost literally. For example, Boris Berezovsky and Roman Abramovich, now well beyond his days of selling rubber ducks, got a large stake in the oil company Sibneft for about $200 million. In 2009, when Putin renationalized the company, Abramovich sold his stake back to the government for $11.9 billion. Talk about a payday.

"Chubais never advertised it publicly — he attempted to keep the goal obscure so as not to alarm the opposition— but loans for shares should really have been called 'tycoons for Yeltsin,'" writes David Hoffman, the former Moscow bureau chief for The Washington Post, in his book The Oligarchs: Wealth And Power In The New Russia. "Chubais was willing to hand over the property without competition, without openness, and, as it turned out, for a bargain price, but in a way that would keep the businessmen at Yeltsin's side in the 1996 reelection campaign."

Yeltsin Is Reelected With Oligarch Money

Holding up their end of the bargain, the oligarchs, who often fought with each other, united forces behind Yeltsin's reelection campaign. They donated millions of dollars to the effort. They hired the best political operatives they knew. They laundered government money with their banks, and fed it into the Yeltsin campaign machine. Two of the oligarchs, Boris Berezovsky and Vladimir Gusinsky, controlled two of the three major Russian television networks — and they blanketed the airwaves with pro-Yeltsin propaganda. Fueled by the immense power of the oligarchs, Yeltsin conducted Russia's first American-style presidential campaign.

As the election approached, Yeltsin made a cynical move to placate critics of his privatization scheme, publicly firing his super unpopular privatization czar Chubais. "He sold off a big industry for next to nothing," Yeltsin told the press. "We cannot forgive this."

Despite waving the banner of free markets and democracy, the reformers of the 1990s — perhaps ironically — did much of their reforms undemocratically, often by presidential decrees that were hammered out through backroom deals with the rich and powerful. Thanks in no small part to the oligarchic beneficiaries of these deals, Yeltsin beat the odds and won reelection. Russian-style crony capitalism was here to stay.

Weeks after the victory, Boris Berezovsky bragged to The Financial Times that he and six other Russian oligarchs controlled half of Russia's economy. That number seems to have been significantly inflated. Nonetheless, by 1996, the world could see that Russia had a new class of industrialists and bankers who wielded enormous power. A class that made their fortunes not through society-improving ideas, consumer-pleasing products, or technological innovations — but rather through corruption, skullduggery, and the plunder of Russia's raw materials. Many Russians would come to resent the oligarchs and the liberal reformers who empowered them.

As Yeltsin's health continued to deteriorate in the late 1990s, the oligarchs began to worry about who would be his successor. The natural heir to Yeltsin would be whoever occupied the post of prime minister. If Yeltsin stepped down, the prime minister automatically became acting president and would have the advantage of incumbency during election time.

In 1999, Boris Yeltsin and his oligarchic allies agreed that an obscure former KGB officer named Vladimir Putin was the man to become Yeltsin's prime minister, and soon Russia's next president. He was a nobody, barely a public figure, but he had a reputation for loyalty. They trusted that, once in power, he would look after their interests. Little did they know that they were unleashing a monster they soon would be unable to control.

Next week in the Planet Money newsletter: enter President Vladimir Putin. (You can subscribe here) .

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Since 2018, Greg Rosalsky has been a writer and reporter at NPR's Planet Money.